How Contract Termination Works
Contract termination is a process whereby a party may end their obligations following a breach on the other party’s part. The contracting parties have agreed in advance to the way that their relationship will be conducted.
The law very much respects the obligation of contract, but has also established equitable answers to situations where strict enforcement of an agreed upon relationship would not be fair.
The Law Dictionary Online defines contract termination simply as: "The conclusion of a legal agreement between two parties."
There are several typical scenarios where contract termination might occur:
Businesses considering contract termination should be aware of a few legal considerations before proceeding with termination. Agreement Provisions: In many cases, particularly with corporations, specific contract termination provisions will be included in the original agreement. It is important to be guided by those provisions before taking any further steps. Failure to do so could establish a precedent with those provisions to be followed in the future. Common Law: Contract common law compliance is essential. Each jurisdiction has similar provisions in its common law concerning this type of matter. Creating a case where future impact on contract law could result from a poorly handled attempt at termination is important to avoid. Negotiations: Though there may be legitimate reasons for pursuing contract termination , it will always be advisable to explore the possibility of negotiating your way out of the agreement. Even if you do have lawful grounds for such a move, it’s usually in the interests of your business to go with the spirit of good business practice, and work with the other party to conduct a successful negotiation. Alternatives to Termination: Depending on what the provisions of the original contract are, it may be possible to defend against some of the worst-case outcomes by renegotiating the contract. This is why it is so important to have quality business representation available to you. While it is very necessary and sensible to have contractual obligations in place for the majority of business activities, the ability to terminate a contract is no less important than the need to develop them in the first place.
Essential Components of a Termination Letter
Whether a termination letter is voluntary or involuntary, it’s critical that the letter contain certain key elements. Because the stakes are fairly high – more so if there’s a lawsuit – the letter must be clear, which means using unambiguous legal language, and explaining the rationale for termination.
Clarity. Mutual agreement is, of course, the Holy Grail of terminations. To achieve it, both parties must be on the same page about the reasons that the contract is coming to an end. A good way for both sides to understand exactly why the contract is expiring is a simple, short letter. It should state the nature of the relationship that is being terminated (i.e., the name of the contract), the parties to the contract, and the date the contract will be terminated.
Legal language. The contract should use both its formal name (e.g., the XYZ Software Developer Engagement) and the status of the parties to it. So, it should refer to them as "the Licensor" (or some variation of that name) and "the Licensee," or "the Owner" and "the Licensee," or whatever the parties called themselves in the original contract.
The letter should also refer to the original contract and it’s provisions by date or section number when possible. Both sections (without the name of the person signing the letter) are included in the sample below.
Rationale for termination. It’s important that the letter provide a rationale for termination, but you don’t have to be overly long or complicated. A simple, "we are terminating this contract because of XYZ reason" is usually acceptable. If you need to provide further justification, you can always provide an additional, attached letter, but only if the additional letter is labeled as confidential.
Sample Termination Letter Template
Below is a generic sample template for a contract termination letter:
Date:
Recipient Name
Street Address or P.O. Box
Suburb, State and Postcode
Dear [Recipient’s Name],
Specify the contract by identifying it as the ‘Contract between [Your Name or Your Company’s Name] and [Their Name or Their Company’s Name] dated [Date of Contract]’. State what contract you are terminating. State the points at which the contract can be terminated without penalty. In this case, the contract and any attached terms and conditions, specify that they can be considered void.
Accordingly, please consider this an official notice of termination. Termination date will be xx/xx/xxxx; this will be your last day of service under the contract we currently hold with your company. I appreciate your cooperation in this matter.
Yours Sincerely/Respectfully,
Your Signature
Your Name
Position Title
Your Company Name
The above is a thorough explanation of a sample letter of contract termination.
Legal Aspects of Contract Termination
When it comes to contract termination, there are legal implications to consider. For example, contract termination can be a nuanced situation in which you might need to give someone notice of termination even though they haven’t materially failed to meet their obligations and no time period previously specified for them to make the required improvement has expired.
In these and other situations, a court might find that you were not in compliance with the contractual terms and provisions. If so, they might rule in favor of the other party and hold you in breach of the contract . While we’re not going to get into the specifics of Breach, Causation, Damages, and Defenses, you should keep in mind that if you pursue early termination without legal justification, the other party may claim damages as allowed by contract law.
Likewise, any parties involved in contract termination may have a claim against you if you fail to give them proper and appropriate notice of termination. In fact, having an attorney write the appropriate contract termination letter on your behalf may protect you from being held in breach of contract should a claim arise.
Delivering a Termination Letter: What to Do Next
Once the decision to terminate a contract is made, the next step is to ensure detailed procedures are followed to validate the termination process. There are specific steps you can take to ensure that a termination letter is given effective notice to a party. The following steps should be followed:
A. Keep a copy of the termination letter on file.
B. Send the termination letter by overnight mail or personal delivery to the other party, with a signature of the person receiving it, on the copy kept on file.
C. Consider signing the termination letter in the presence of a witness who can sign the copy of it kept on file, or adding a hand-written certification that the termination letter was delivered in the presence of a witness who then signed the copy.
D. Document and file the termination letter, with the signature and/or certification, and documents created during the negotiation process that establish the other party was aware of potential issues and opportunity to cure contractual defaults, if any, prior to termination, along with all communications with the other party concerning the termination and receipt of the termination letter.
E. If the contract is with a company or other business entity, take steps to make sure a party representative with authority to receive termination letters actually receives one.
Responding to a Contract Termination
When you send a sample letter of contract termination to the other party, you should be prepared for a variety of reactions. Depending upon the nature of the contract, their emotional reaction to the news and how well you communicated with the other person in the past, they might respond in a way that is less than amicable. You should be prepared for some pushback when sending the termination letter, and know how to approach the situation.
The best solution is to have an open dialogue with the other party about the issues that led to the termination before sending the letter. This will give them a chance to respond in a constructive manner, rather than with anger or threats.
If the person responds with an emotional letter or email after receiving your letter of termination, it’s important to stay calm. Do not respond with anger or emotion. Instead, you should inform the person that they have had their chance to speak . Don’t write back just to further explain your position, and certainly don’t respond with any type of rebuttal. If they attempt to contact you with legal threats, inform them that they should consult an attorney and that it is not something you wish to discuss further.
You should hold firm to your position on the contract’s termination, but at the same time you don’t want to inflame the situation and escalate it needlessly. If the termination letter was effective and clearly explained your reasons for termination, you are in a good position to diffuse the situation without any further escalation.
With any luck, termination of this contract will free you up to work more effectively with other clients or complete contracts you are already pursuing. Keep the lines of communication open with the remaining parties, and don’t let one negative experience with a difficult client have a negative influence across the entirety of your business.
