What is a Contract Termination Letter?
One of the most important – yet overlooked – aspects of a lawyer’s job is often the drafting of a termination letter. And this is especially true in the context of a contract.
Typically, when a party to a real estate, lending, lease, employment or other contract has cause to terminate that contract, the party writes up a termination letter to send to the other party to that contract. This termination letter lays out the reasons for the termination and the date on which the termination will take effect.
While this is a fairly routine aspect of many contracts, many parties often overlook the importance of these termination letters and do not take the time to do them properly. Often, one or both parties to a contract finds that other party’s termination letter to be totally inadequate. A poorly worded termination letter can, in some cases, effectively be a breach of contract itself. For example, siblings who inherit an investment property together from their parents have used such letters as weapons in this context.
Additionally, a badly written termination letter can lead to substantial claims by the other party that are difficult to dispel . For example, even when you think you are firing a nasty employee for good cause, if that employee is given other reasons for the termination in the termination letter and he or his attorney work together to come up with a persuasive argument that you actually fired that employee for reasons unrelated to his performance or disobedience, you can put yourself in deep trouble.
A contract termination letter tends to serve two purposes: first, it notifies the terminating party that that party has terminated the contract. That seems simple enough, and is fairly self-explanatory. Second, the termination letter serves the notice that the cessation will be effective on a certain date. That is the more complex function of the termination letter.
The importance of each of these points cannot be overlooked. While it is indeed possible to call someone and tell them that the relationship is over, nothing helps cement those terms like a clear, well-worded letter that clearly lays out the termination of the contract and the date on which that termination will be effective.
Termination Letter Requirements
When preparing a termination letter, the first and most important component is the date of termination for the contract. Without this, the recipient of the letter wouldn’t be notified properly as to when the contract was or will be terminated. This is crucial for any additional steps that may need to be taken after termination is enacted.
The next component that should be included with a termination letter is the reasoning behind the termination. In signing a contract with another party, the two agree to the terms and conditions of the contract, which describes the obligations both parties are expected to fulfill. If one party does not uphold their end of an agreement, then the other party must have a legitimate reason for terminating the contract, or else it could be considered a breach of contract.
The termination letter should also specify any obligations that NEED to be fulfilled before the termination date. This may include any resources or payments that will need to be made by either party prior to the termination. They could also outline any obligations that either party will still have after the contract has been terminated.
A termination letter is not just a notice of termination; it should also describe the steps either party needs to take once the contract has ended, to avoid any potential issues that may arise.
Legal Terminology Considerations
Legal considerations of a contract termination letter
Either because a contract has been performed wrongfully or because of another reason, you may need to terminate an existing contract. However, in order to terminate the contract on valid legal bases, it is generally recommended to send a termination letter to the relevant party.
For a termination letter to be valid, it must comply with certain requirements set out by law. Depending on the jurisdiction that the contract is governed by, the legal requirements for a termination letter will vary. If an individual or company ignores these legal requirements when drafting the termination letter, it is extremely likely that such a letter would be considered as invalid in a court of law. The following legal requirements are just examples of the common legal requirements for a termination letter:
Because a variety of courts and tribunals deal with disputes arising from contracts, contract termination letters must have a clear intention to terminate a contract and specify the authority under which the termination is being done. Most tribunals and courts recognize a unilateral contract termination where parties had specifically agreed to include unilateral termination as a resolution method.
In some scenarios, an automatic termination clause is included in a contract. In essence, this is a type of clause which leads to the termination of the contract, often after a material breach of any term in the contract, without any notice. It is important to remember though that such termination clauses are only enforceable when they are reasonable and do not depend on the discretion of the party wishing to terminate, and when the material breach is serious enough to justify terminating the contract. A requirement for the enforcing party to give notice usually is reasonable depending on the circumstances, so that the other party may rectify the breach. In addition, a party could be able to exercise its right to terminate even if the breach was actually willing.
However, if the contract does not have an automatic termination clause, then a party may be required to wait until a reasonable notice period has expired. The period of waiting can be specified in the contract, or if one is not included, then the reasonable duration would be determined depending on various factors. If a contract cannot be terminated within a certain period, then the aggrieved party may need to consider whether he/she wishes to alter or rescind the contract.
It is very important for parties to seek legal advice before sending a termination letter to another party, in order to prevent themselves from being liable to the other party for a wrongful breach of contract claim. If the contract was terminated in accordance with the termination letter, then a court may allow the named claimant to recover the losses resulting from the termination.
If a party has reasonably breached a contract, and had validly terminated the contract, but the aggrieved party sent a termination letter without providing a sufficient notice period to the breaching party, then the aggrieved party could be liable. However, if the aggrieved party had terminated despite the fact that the other party had rectified the breach that had been committed, then such a claim for wrongful termination would usually be invalid.
Termination Letter Language
Critical to the overall success of a termination letter is the language selected. Once again, because of the importance of this document, it cannot be either too formal or casual. The intention without question is to communicate the termination of the agreement; similarly important, is to ensure the termination letter is written using professional and clear language. While it is not necessary to include any detailed information, such as the reasons for termination, nevertheless the termination letter should be clear.
It is also important that the tone to the letter is respectful. A termination letter is no different than any other kind of business letter; however, in the case of a letter terminating a contract, it is always best to expect that the termination agreement will be taken personally by the other party. Thus, it is important for the letter to be worded in a manner that if the other party were to review it years later, perhaps in a lawsuit, it would only indicate the termination in a unemotional manner.
Termination Letter Samples
Lease Termination Letter
[Your Name and Address]
[Date]
[Other Party’s Name and Address]
Dear [Other Party’s Name],
Under Section 10 of the Lease Agreement between you and [your Company Name], dated and executed on [date of execution], I am providing you this written notice of my intent to terminate the agreement 30 days from today.
Please vacate the premises by the end of the day on [termination date].
Thank you,
[Your signature]
[Your Typed Name]
Purchase Order Cancellation
[Your Company Name]
[Your Company Address]
[Date]
[Vendor’s Company Name]
[Vendor’s Company Address]
Dear [Vendor Contact Name],
Due to [reason for termination] , this letter serves as formal notice of cancellation of requisition [purchase order number and date] between [Your Company Name] and [Vendor’s Company Name].
Your immediate attention is necessary to cancel this order.
Thank you,
[Your signature]
[Your Typed Name]
Supplier Termination
[Your Company Name]
[Your Company Address]
[Date]
[Vendor’s Company Name]
[Vendor’s Company Address]
Dear [Vendor Contact Name],
We are hereby giving notice that, effective [termination date], [Your Company Name] will no longer require products and services from your company.
Please take the necessary steps to end your association with [Your Company Name].
Sincerely,
[Your signature]
[Your Typed Name]
Common Errors to Avoid
Common mistakes to avoid when writing a contract termination letter include not being clear about why you are terminating, either in the letter or subsequent conversation. Leaving it up to interpretation can lead to litigation. This is especially true if the reason for termination is your personal dislike of the other party to the contract.
Another mistake is not specifying to the other party what you expect them to do after receiving the termination letter. This will certainly lead to problems. Also, if you do not mention what the contract calls for in the way of notice, this may come back to haunt you. In Florida, for example, if the contract does not mention it, the legal requirement is one calendar month. However, what I have seen done and agree with this approach is provide 30 days notice so there is never a question of whether that period of time is met.
In addition, it is common for letters like this to go out by email, but an email is not a document as that word is commonly understood, which means that it may not be legally enforceable. Finally, failing to take the time to change the terms of the contracts before termination can haunt you. A typical situation occurs when a contractor has gone ahead with forming a company and taken on lines of credit using its new name without changing the contract transfer language, which usually has strict requirements for the new entity to take over the original contract.
Completing and Delivering an Effective Termination Letter
Ideally, the sending party should designate the method of transmission for the termination letter in the contract itself in order to eliminate any ambiguity or confusion. If the contract does not include such a specification, best practice suggests that the sending party provide the termination letter by certified or registered mail so as to obtain proof of receipt. (See Certified and Registered Mail, United States Postal Service).
If the terminated party’s receipt of the termination letter is of the essence, either because the sender desires to terminate during a specific time period or because specific damages are caused by notice delay, the best practice is to send the termination letter by other means of delivery with next-day delivery: for example, electronic mail (e-mail), fax (facsimile), or overnight delivery (e.g . , Federal Express Corp., United Parcel Service (UPS), Courier, etc.). (See Electronic Mail (e-mail), The Administrative Office of the U.S. Courts; Facsimile (Fax), The Administrative Office of the U.S. Courts; and Express Services, United Parcel Service).
In addition to sending the termination letter by the prescribed method under the particular governing contract (if any), the sending party should, on the same day, send a copy of the termination letter by another method (e.g., e-mail, fax, overnight delivery) in order to establish documentary proof of its effective receipt by the receiving party.
The parties should retain the final version of the termination letter, including all copies transmitted to the receiving party, in their corporate files, along with the delivery confirmation documents obtained by the sending party.
