What is Contract Termination?
At its most basic, contract termination is the process of terminating a legally binding agreement prior to its set time. This process may occur with a mutual agreement from both parties involved in the contract, or it may be voluntary or involuntary.
Contract termination typically occurs only once the terms of the contract have been fulfilled, but there are several exceptions that may lead to the need for termination prior to this time: Termination of contract is a critical element of business and corporate law. In many cases, agreements are fulfilled on time, but there are some instances when certain obligations of contract fulfillment may remain. It is, therefore, not uncommon that notice of contract termination may be required prior to contract fulfillment. In such cases , a professional motion to terminate contract must be provided to the counterparties per the guidelines set out in the agreement (i.e. notice of termination letter). A proper breakdown of the process toward a contract termination includes an adequate contract termination letter template. Using templates allow users to maintain professionalism when creating correspondence to clients. By following templates, readers can effectively understand the termination process, which brings them comfort regarding potential future withdrawal of contract. Properly writing a termination letter is a critical component of the complete corporate process, as will be discussed in the "Contract Termination Letter Template" section below.
Must-Have Components for a Termination Notice
Regardless of the circumstances prompting the termination, any contract termination notice should, at the very least, contain the following elements:
- Identifying the parties to the contract and referring to the contract itself by date and type.
- Setting an effective date of termination (typically no less than 30 days from the date of the notice).
- Specifying the reasons for termination, whether in detailed form or less detailed.
- Setting out any post-termination obligations that survive the contract term (like confidentiality or non-compete provisions).
It’s also wise to end a termination notice on a positive note, assuring the recipient of good feelings towards the future and inviting contact should there be any questions. A termination notice is, above all, a consumer product – its tone must be professional and its content be composed in a way so as to not kill a potential go-forward business relationship.
Factors to Consider When Drafting Termination Notices
When crafting a contract termination notice, there are key legal considerations that must be observed. If these safeguards are not observed, then the result of a poorly written contract termination notice can lead to default or breach of contract liability. Because we want to avoid scrivener’s error (or, in this case, error on the writer’s part), it’s best to start with a list of steps to make sure we’ve covered all of our bases.
To begin with, if there is a contract provision requiring notice, due regard must be given to that provision. If the contract provides for a method for providing notice or a particular time when such notice becomes effective, then proper notice must be given. If there is no such provision in the contract itself, then generally compliance with the statute requiring notice should be observed. In other words, if the contract required notice to be hand-delivered and you mailed it instead, even if it was a mere scrivener’s oversight, your notice could be deemed ineffective. This could lead to default or breach of contract liability, as mentioned before. Assuming the contract requires notice to be in a certain form, a statute may provide a detailed method of service or other guidance as to how to effectively serve notice. Ignoring either your own contract or the statute may get you into trouble with the court.
Another consideration in drafting a termination notice is whether you have the authority to send a contract termination notice. This often comes into play setting notice under another’s contract. For instance, this may arise in the context of a master agreement containing a construction schedule or a warranty agreement warning that materials void the manufacturer’s warranty if one is not used on new construction. If you don’t have the authority to send a termination notice on a particular contract (and successfully argue your right to do so), the termination notice will fail.
If the termination notice is not based upon something already set in motion and going towards some larger agreement, including disposition of claims and liabilities, then you may be subject to liability for wrongful discharge. This obviously only applies to employment termination notices, but does not need to be ignored during a termination notice that will end up in litigation.
Template Personalization: What You Need to Know
These templates are designed to be flexible so you can edit them to suit your specific contractual obligations or the industry standards that apply to your circumstances.
There may be limitations under local or state laws on how much notice you have to provide to terminate a contract and/or the method of delivery of that notice. For example, if you are terminating an employment contract, the employee may be entitled to severance pay if terminated without notice, or you may be required to establish just cause for termination . If you are terminating a construction or service contract, some states require that you send it as a certified letter. You may also be required to formally meet with the other party before terminating the contract. The templates that we provide are designed to be generic in nature and are meant to be used as a starting point. You should consider your own specific contractual obligations and whether any statutory restrictions apply when delivering a contract termination notice.
Avoiding Common Errors
As with any important written communication, it is crucial to get a termination notice or letter right and avoid common mistakes that can have unintended consequences. Here are some of the most frequent problems:
- A failure to comply with the terms of the contract itself. Remember, if there are contractually agreed upon procedures for terminating the agreement, they must be followed or the termination may be deemed ineffective. If you don’t have that requirement in writing, it is still a good idea to draft an enforceable termination letter that complies with the generic "reasonable notice" standard so that the notice will be legally binding and effective.
- An overly short notice period. Because most contracts have specific requirements for the notice period, we recommend erring on the side of longer notices, which can mitigate the risk that the termination would not be legally valid.
- Not being overly specific. For example, when you do not have a specific reason for the termination, you may think it is prudent to say that the contract is terminated for "no particular reason." This is actually a risky statement that can be misconstrued in light of the general contract principle that agreements are terminable at will. There is a misconception that an at will termination is not legally binding, when in fact, nearly every contract can be terminated at any time unless expressly prohibited by the terms of the agreement. So if you think it is completely "at will," simply say it is being terminated at will.
- Omitting a future effective date. This is a common error that we are often asked to fix after the termination letter has been sent. Your not having this language in the termination letter will not invalidate the termination, but your having it can provide clarity and eliminate a disputed termination date, such as when a party doesn’t want to stop performance immediately.
- Omitting a statement obviating the need to take further action. It is important to remember that once a notice is given, no further performance is required under the contract unless the notice specifies otherwise.
- Using past correspondence to describe a separate agreement. It is common to state that the recipient is advised that an agreement between the parties’ predecessors in interest regarding (name of topic) remains in full force and effect and shall remain binding upon the parties. Be sure to specify up front whether the agreement has been amended; otherwise, it may be deemed that the agreement has not been amended and that the prior agreement is the operative version. Make sure that you are using the correct version of the prior agreement as well.
If you avoid these risks, your contract termination notice or letter will be more likely to have the desired effect and to be legally binding.
Template of a Contract Termination Notice
Use the following contract termination notice template to provide your business the protection you need. When properly drafted, the notice will close the gap between legal action and a polite hand-off to the removing contractors.
ABC Company ("Company")
Attn: [Name of company contact]
[Street Address]
[City, State ZIP Code]
M(a) to be Delivered Via [Email/ Certified Mail/ Fed Ex]
[Month, Day, Year]
RE: NOTICE OF TERMINATION OF CONTRACT
This is a Notice to inform you that in accordance with: (1) the terms of your Agreement with ABC Company dated [Month Day Year] (the "Agreement"); (2) the period provided for in the Agreement; and (3) applicable law , your relationship with ABC Company is hereby terminated effective immediately.
If you have any property in your possession belonging to ABC Company, we request that you return all such property on or before [Month Day, Year]. Your contractual obligations under [Section 1.6 of the Agreement] shall survive this termination for the time period stated therein.
Thank you for your prompt attention to this matter.