There are circumstances when you will need to terminate a contract ahead of its completion. This could be due to many reasons, such as no longer needing the services offered, a change in your circumstances, or a violation of the contract by the other party, to name a few. In such a situation, you will need to use a Contract Termination Letter.
As an employer or contractor, the importance of developing, maintaining, and following strong contractual agreements cannot be overestimated. Legal contracts protect both parties and offer a legal framework for what is expected from both entities, including but not limited to deadlines, rates, policies, and more. So, what does it mean when you have to send a contract termination letter?
Let’s look more closely at what it means to terminate a contract, how to write a contract termination letter, and the processes involved.
What it Means to Terminate a Contract
When terminating a contract, it is only reasonable to do so if the contract terms have not yet been completed.
If a contractor has been hired to renovate your bathroom, you cannot terminate the contract after the bathroom has been finished.
When an employer or contractor decides to terminate a contract, they do so in order to dissolve all responsibilities that the contract lays out on both sides, meaning that both parties will no longer be required to fulfill their duties as laid out by the language of the contract.
To understand the intricacies of a contract termination letter also known as the Cancellation of a Contract or a Contract Termination Notice, it is also important to discuss what it does not do. Terminating a contract does not protect either party from any discontinuities or violations of said contract that may have happened before the contract was terminated as was in effect. Contract termination will also not keep either party from claiming any possible damages that may have been incurred or absolve the violating party from termination policies outlined under the agreed-upon contract.
Types of Contract Termination
Either party may choose to terminate a contract for a multitude of reasons. However, there are two main types of termination.
Let’s take a closer look at both:
Termination for cause
A termination for cause, also known as termination for default, is a termination that is considered a direct response to a violation of contract terms. This is invoked only in case of a material breach of the contract. Review the contract closely; has the other party done or not done something that can be considered a material breach of contract? Did you attain lesser benefit in terms of services than you had originally been promised? Did the contract violation make the initial reason for the contract null and void? If the answer to any of these questions is yes, you may be able to terminate the contract with cause.
The court will consider all of the above questions when determining if you can terminate the contract for a material cause. Courts will need to examine whether monetary damage has been incurred and how much that damage may total. A material breach is considered a breach of the entire contract. Courts rule on material breaches of contract case-by-case and will always take into consideration the initial reason for the contract.
Termination of convenience
A “termination of convenience” means that the right to terminate directly relates to the terms of the contract itself. If the agreed-upon contract has provisions for termination, this would be followed when terminating the contract based on convenience.
Use of a Contract Termination Letter
The contract termination letter should be clear and concise and must include a few key points to be valid; this letter should briefly summarize the purpose of the contract you have decided to terminate, the reason for your termination, the date of the contract, any termination policies as outlined in the contract, and the date of the letter.
The contract termination letter is used as a written record to show that all parties of the contract have been notified of the intent to terminate the contract.
Before you send an official contract termination letter, it is highly recommended, although not required, that you give prior written notice to the violating party along with what is called an “opportunity to cure”. The general principles of contract law do not technically require you to give the other party this opportunity, however, it will ensure that should any arbitration or legal action ensue, you have done everything possible in your control to rectify the situation.
It is also important to remember that not all contract terminations will end in disappointment, disagreement, or litigation. A contract termination letter can often be seen as a way to end the agreement while still maintaining a courteous working relationship with the other entity in the future. Let’s look more closely at the details and one of a properly written contract termination letter.
The Tone of a Contract Termination Letter
It is understandable that you may be personally upset, frustrated, or angry when deciding to terminate a contract. However, it is of great importance that you maintain a polite, friendly, and kind tone when you sit down to draft your contract termination letter. Furthermore, keep the letter brief and only focus on your primary reason for terminating the contract, unless you are trying to form a case for damages in the future. In addition, this information could be used against you should there be any litigation involving the contract termination.
Avoid the temptation to let your anger or frustration seep into the wording of your letter. You never know when you will want to use this vendor or employee again in the future, and having sent them an angry contract termination letter could limit those possibilities. The saying “you catch more bees with honey than with vinegar” applies strongly here as well; if you are hoping the other entity may pay for damages or make amends with you in some way, a kinder and friendlier tone will go a long way towards maintaining the positive nature of your business relationship.
Writing a Contract Termination Letter
A contract termination letter should include a few very specific elements to be considered accurate and serve its purpose.
Here are the elements you must include in your contract termination letter, as well as a brief description of each:
State the purpose of the original contract in detail. What was expected of both parties? What was the timeline of the work as outlined in the contract? What were the deliverables as stated in the contract?
This letter is regarding our contract for Company A to renovate our restaurant kitchen. The renovation began on June 20, 20XX, and was due for completion on August 1, 20XX. This included but was not limited to complete reflooring, plumbing upgrades, new drywall, and electrical replacement.
Include when the contract was signed originally, and what were the contract’s deadlines that were agreed upon by both parties.
The two parties entered into this contract on June 1, 20XX. Work was set to start on June 20, 20XX and is due to be completed by August 1, 20XX.
Reason for terminating
Consider this element of the letter carefully. Consider whether you are terminating the contract based on material cause, or terminating for convenience. Outline any breaches of the contract clearly and concisely, remembering to keep your tone friendly and polite.
We wish to terminate this contract based on a material breach of the contract. The work has not been completed in the allotted time, and Company A has not been able to rectify the situation despite our notice for an opportunity to cure.
Include termination policies
Company A will be paid out for services already rendered, per the contractual obligations previously agreed upon.
In this section of a contract termination letter, including when you are seeking to have this contract termination take effect. Keep in mind this will also be based on any contractual obligations that may need to be followed.
This termination goes into effect per the receipt of this letter on this day, August 15, 20XX.
Don’t forget to include the date you are finalizing the letter of contract termination at the top of your letter.
Contract Termination Letter Template
Dear (Insert Name of Entity, Employee, or Organization),
I am sending you this letter regarding the contract that we both entered into (Contract Date). Unfortunately, I am contacting you in order to terminate this contract due to (reason for termination). According to the contract, this notification complies with the termination terms as laid out therein. This letter is being sent well within the required notice period based on our agreement. We will make any payments already owed based on services that have already been rendered and the termination obligations included within the contract. Your company has consistently provided excellent service; we appreciate your hard work and hope to continue growing our professional relationship in the future.
Please reply as soon as possible to confirm that you have received this notice of contract termination. In addition, if you have any questions or concerns, please feel free to reach out to (insert name and contact info).
(Name of Company or Organization)
(Date of Letter)
Wrongful Termination Precaution
There are some cases in which terminating a contract may not be legally allowed based on the terms of said contract or general contract laws. This means that in certain situations, terminating a contract could be against the contract itself, and thus you could be breaching the contract by requesting the termination. In addition, inciting a wrongful termination may mean that you could owe the other party damages based on the contract terms laid out in the original contract.
Damages may be owed to the non-breaching party in the event that you terminate the contract wrongfully. These damages might include consequential damages or direct damages that would put the other party in the original financial position they would have been in if the original contract had been taken to completion and not violated.
A negative consequence may be involved, should a party terminate a construction contract wrongfully.
You could still owe costs to the contractor for the work they have already completed before the time of the termination, in addition to any overhead they have already spent or lost profits. In other words, you may owe a substantial sum of the total balance.
Before sending your letter of termination, we would encourage you to work on allowing the offending party to remedy whatever issue may have initially gotten you to terminate the contract. Remember, a contract termination does not need to be hostile or end your professional relationship with the other entity. Be clear, concise, and accurate when writing your contract termination letter and include all the pertinent details as outlined above. If applicable, don’t forget to thank the other party for their service and remind them that you would like to continue your professional relationship in the future at some point in time.