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 Termination Letter for the Contract.
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 this termination letter?
Let’s look more closely at what it means to terminate a contract, how to write a 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 still need to be completed.
EXAMPLE
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 such a 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 it 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 the termination policies outlined under the agreed-upon contract.
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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 a termination for default, is a termination that is considered a direct response to a violation of contract terms. This is invoked only in the event 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 benefits 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. The 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
“Termination of convenience” means that the right to terminate directly relates to the terms of the contract itself. If the agreed-upon contract has termination provisions, this would be followed when terminating the contract based on convenience.
Use of a Contract Termination Letter
The letter should be clear and concise and must include a few key points to be valid; it 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.
It is used as a written record to show that all parties to the contract have been notified of the intent to terminate the contract.
Before you send an official 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 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 of a properly written termination letter.
The Tone of a Contract Termination Letter
Understandably, 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 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 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.
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Writing a Contract Termination Letter
It should include a few very specific elements to be considered accurate and serve its purpose.
Here are the elements you must include in it, as well as a brief description of each:
Contract purpose
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?
EXAMPLE
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.
Contract date
Include when the contract was originally signed and what the contract’s deadlines were that were agreed upon by both parties.
EXAMPLE
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.
Reasons 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.
EXAMPLE
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
If the original contract contained any termination policies or conditions, include them in this section concerning the original contract.
EXAMPLE
Company A will be paid out for services already rendered, per the contractual obligations previously agreed upon.
Termination date
In this section of the letter, it is included when you are seeking to have this contract terminated. Keep in mind that this will also be based on any contractual obligations that may need to be followed.
EXAMPLE
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
[Your Full Name]
[Your Position/Title, if applicable]
[Your Company/Organization Name, if applicable]
[Your Street Address]
[City, State, Zip Code]
[Your Email Address]
[Your Phone Number]
[Date]
[Recipient’s Full Name]
[Recipient’s Position/Title]
[Recipient’s Company/Organization Name]
[Recipient’s Street Address]
[City, State, Zip Code]
Dear [Recipient’s Full Name],
Subject: Termination of Contract between [Your Company/Organization Name] and [Recipient’s Company/Organization Name]
I am writing on behalf of [Your Company/Organization Name] to formally notify you of our decision to terminate the contract [Contract Name/Number], dated [Original Contract Date], between [Your Company/Organization Name] and [Recipient’s Company/Organization Name]. This decision has not been made lightly and follows careful consideration and review of the terms and conditions outlined in our agreement.
As per the provisions outlined in Section [Specify Section] of the contract, either party may terminate the agreement provided that [mention any required notice period, e.g., a 30-day written notice] is given prior to the intended termination date. Accordingly, please consider this letter as our [mention any required notice period] notice, with the effective termination date being [Specify Termination Date].
The reason(s) for termination are as follows: [Briefly describe the reason(s) for termination, ensuring to remain professional and factual. This could include non-compliance with terms, mutual agreement to part ways, changes in business needs, etc.]
We request that all outstanding obligations be settled by the termination date, including [list any necessary actions, such as final payments, return of property, completion of pending deliverables]. Furthermore, we would appreciate your cooperation in facilitating a smooth transition and cessation of all related activities.
Please ensure that all correspondence and inquiries regarding this termination and any actions required thereafter are directed to [Your Name or the designated contact person] at [Your Email Address] or [Your Phone Number].
We would like to take this opportunity to thank you for the efforts and collaboration during the term of our contract. We wish [Recipient’s Company/Organization Name] success in your future endeavors.
Should you have any questions or require further clarification regarding this termination, please do not hesitate to contact me directly.
Thank you for your attention to this matter and your cooperation in concluding our contractual relationship amicably.
Sincerely,
[Your Full Name]
[Your Position/Title]
[Your Company/Organization Name]
[Your Contact Information]
Sample Contract Termination Letter
Dear Ms. Jameson,
Subject: Termination of Contract with ABC Supplies, Inc.
I am writing on behalf of XYZ Corporation to formally notify you of our decision to terminate the supply contract (Contract #12345), dated January 1, 20XX, between XYZ Corporation and ABC Supplies Inc. This decision has been reached after a thorough review of our current operational needs and future strategic direction.
In accordance with the terms outlined in Section 8 of our agreement, either party may terminate the contract with a 60-day written notice. Therefore, please consider this letter as our formal 60-day notice, making the effective termination date May 8, 20XX.
The primary reason for this termination is the realignment of our procurement strategy, which involves consolidating our supply chain to enhance efficiency and reduce costs. This decision is in no way a reflection of the quality of services provided by ABC Supplies Inc., which have consistently met our expectations.
We request that all outstanding orders be fulfilled and delivered by the termination date. Additionally, we ask for the final invoice to be sent by May 15, 2024, to ensure all accounts are settled promptly. Should there be any company property or materials in your possession, please arrange for their return by the termination date as well.
All further correspondence regarding this termination and any necessary actions should be directed to my attention at john.doe@xyzcorporation.com or (555) 321-9876.
We would like to express our sincere appreciation for the service and support ABC Supplies Inc. has provided during the term of our contract. We wish your company all the best in your future endeavors and hope that our paths may cross again under different circumstances.
Should you require any further information or clarification regarding this termination, please do not hesitate to contact me directly.
Thank you for your immediate attention to this matter and for your cooperation in ensuring a smooth and amicable conclusion to our contract.
Sincerely,
John Doe
Procurement Manager
XYZ Corporation
(555) 321-9876
john.doe@xyzcorporation.com
Key Takeaways
This termination letter effectively communicates XYZ Corporation’s decision to terminate their contract with ABC Supplies Inc. while maintaining professionalism and clarity. Here’s an analysis of its key elements:
Formal Introduction: Begins with a formal greeting and introduces the purpose of the letter upfront, setting the tone for the communication.
Clear Notification: Clearly states the decision to terminate the contract and cites the contract number and effective termination date, ensuring transparency and adherence to contractual terms.
Reason for Termination: Provides a concise explanation for the termination, citing a strategic realignment of procurement strategy, while also acknowledging the quality of services provided by ABC Supplies Inc.
Request for Fulfillment of Obligations: Requests fulfillment of outstanding orders, final invoice submission, and return of company property, ensuring a smooth transition.
Contact Information: Provides contact details for further correspondence, ensuring accessibility for any queries or clarifications.
Appreciation and Well-Wishes: Concludes with expressions of appreciation for past services and well-wishes for ABC Supplies Inc.’s future endeavors, maintaining a positive and respectful tone.
This letter is effective due to its clear and concise communication of the termination decision, adherence to contractual terms, and professional tone throughout. It ensures all necessary actions are outlined and provides avenues for further communication, fostering a smooth and amicable conclusion to the contract.
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 if 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.
EXAMPLE
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 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.
Conclusion
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 it, 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.
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