Contracts are essential articles that guide the relationship between two or more parties. These agreements define the scope and responsibilities of consenting individuals and businesses. However, it is crucial to have a buffer for an unplanned exit by one or more partners.
A contract termination letter contains detailed information about the proposed cancellation. It helps the recipient absolve the impact and adjust to the situation. Moreover, you need to present the document professionally and respectfully.
In this article, you will discover the systematic process of creating and posting a contract termination letter.
Sometimes, people fail to see their contracts through to a conclusion. It could happen at the start, midway, or almost at the end of the duration. When a partner tenders a contract termination letter, you should know what it means.
What Does it Mean to Terminate a Contract?
Terminating an ongoing contract refers to a situation whereby the provisions of an agreement are ended prematurely. Although partners still have obligations based on the contract, they suspend such indefinitely. For instance, a supplier could stop delivering raw materials to his or her client before the contract’s expiry date.
Furthermore, the untimely ending of a contract does not absolve parties of the damages due to such an action. Partners need to account for and resolve the ensuing liabilities. Moreover, the recipient has the right to claim damages under the guiding laws. If the canceled contract contained termination clauses, parties must see to its implementation.
Reasons for Writing a Contract Termination Letter
People discontinue agreements for several reasons.
Some of the reasons to write a contract termination letter include:
Cessation due to insolvency
When a partner loses the source of funds for the existing contract, being financially responsible becomes impossible. Thus, the affected individual could issue a contract termination letter.
Contract with a defined duration
It refers to an agreement that has outlived its purpose. From the effective expiry date, a party can stop fulfilling the provisions of a contract. If necessary, parties may extend the contract or create a new one.
Termination due to occurrences beyond a party’s control
When natural disasters like tsunamis, hurricanes, or earthquakes happen, they destroy tons of properties. In such cases, the affected partner can discontinue the contract. Also, the aftermaths of protests and riots may cause a party to cancel a contract.
Reversal of the contract
If a party secured the partnership with false information, you may cancel the agreement. Illegality, fraud, and misrepresentation are valid reasons to rescind a contract. For example, if you bought property based on false or incomplete information from the seller, you may reverse the contract. Moreover, an agreement that a minor or aged makes may be subject to rescission.
Types of Contract Termination
The two main forms of agreement cancellation include “for cause” and “for convenience.”
Termination for cause
It happens when a party lacks the resources or capacity for full execution of their responsibilities, as stated in the contract. For instance, a supplier chose to suspend the agreement because the other party failed to make payments before the deadline.
Conversely, the company could cancel the agreement if the supplier could not meet a deadline. In both cases, a party defaulted in its obligations. However, before you proceed, you need to ascertain your role in the situation. Did you make complaints promptly? Did you call for the rectification of the problem? Did you warn the other party of your intention to discontinue?
Termination for convenience
If a partner decides to cancel an agreement despite no contravention from the other partner, it is “termination for convenience.” Putting this into writing gives it a legal undertone. However, you cannot simply terminate an agreement because it has outlived its purpose.
The initial contract should contain the duration for informing the affected partner before you pull out. For example, giving a 30 days’ notice before cessation. Moreover, people include clauses that encourage discontinuation due to convenience because it keeps out litigation.
The Termination Clause
Before an individual or business can discontinue an agreement, there is a need for a termination clause. The location of the provision may vary due to industries. Ideally, you should find them after the details of the terms and scope.
When you have a clear cancellation provision, it saves you from an expensive lawsuit. Also, it explains the limits of your duties. While liabilities may arise due to ending a contract, such provisions can shield you from them.
Moreover, most courts allow parties to create a suitable discontinuation clause for themselves within the extent of the common contract law. For example, partners must commit to fulfilling their obligations regardless of circumstances. If the court observes nonchalance from a party, it may seek compensation for the affected counterpart.
A Contract that Lacks a Termination Clause
In some situations, an existing agreement may not have a cancellation clause. When such happens, partners have the opportunity to modify the terms of the agreement. Adjusting the document to contain a termination clause allows you to discontinue peacefully. Howbeit, it has its attendant risks. Further, being explicit on the reasons for the inclusion may convince the other partner.
Locating a Termination Clause
Termination clauses vary based on industry vocabularies and business descriptions.
However, these statements may indicate such provisions:
Either partner can discontinue this alliance including the details of its agreement whenever they choose, without any reason, and without pre-notifying the other partner, subject to the provisions…
As stated below, an end may come to this relationship at any point…
After due notification, this agreement will end in accordance with the following terms and circumstances…
As reflected in the provisions of this contract, a termination comes into effect instantly.
What happens when a party discontinues an agreement?
Usually, an individual or company reserves the right to issue a contract termination letter to his or her partner. If there was no provision for discontinuation in the original contract, the document should contain the reason for such an action. Moreover, you should add other details, as you deem necessary.
It is pertinent to explain the circumstances leading to your decision and the violated clauses. If need be, it serves as a credible piece of evidence in a lawsuit. Meanwhile, it may or may not include information on post-discontinuation steps. For instance, a company may or may not inform a sacked worker how to access health insurance.
How to Write a Contract Termination Letter
A typical contract termination letter has the following segments:
- Contact details of the issuer placed at the top of the page in contract termination letter.
- Concise articulation explaining the issuer’s decision to end the agreement.
- Explanation of the details of the contract cancellation.
- A conclusive assertion that the termination is final and changeless.
- A highlight of the liabilities due to the cessation.
A contract termination letter is an official document showing the intention of a party to suspend its obligations under an agreement. When developing the notice, ensure it conforms to the provisions of the initial contract. Creating a contract termination letter from scratch might pose some challenges. However, you can follow this guide for a head start. Meanwhile, consult a legal practitioner for robust advice.
Sender’s address
The title, name, and contact details of the issuer should be the first thing on the contract termination letter.
The decision to discontinue the contract
This section of the contract termination letter is the next thing the reader sees. Express your intention in clear, simple terms.
Events leading to termination
Highlight the provisions of the agreement that the other party violated in this section of the contract termination letter. For instance, Company X breached the terms of the contract by failing to deliver high-grade stainless steel at the specified deadline.
A tone of finality
This section of the contract termination letter, declaring that the violation is significant and cannot be overlooked. As a result, your termination is unalterable.
Liabilities
Highlight liabilities arising due to the breach of the agreement, and how you intend to recover the damages. For instance, due to the delay in delivering the high-grade stainless steel, Company Y proceeded to Company Z to purchase alternative stainless steel. Consequently, Company Y incurred liabilities amounting to $200,000. We will issue another document within 30 days explaining how we will recoup the damages.
Issuing a Contract Termination Letter to the Other Party
It is imperative to approach agreement discontinuation professionally. A written contract termination letter provides a legal backup to your intention. Ideally, the initial contract should contain the mode of communicating such a decision. It could be from an official email account, a recognized courier service, or by fax. Also, it contains the duration for notifying the other party.
Before you start writing a contract termination letter, ascertain the form of termination procedure – either “for convenience” or “for a cause.” Furthermore, ensure the title reads, “Contract Termination Letter”
As mentioned earlier, inform the recipient of the reason for your decision and the relevant clauses he or she contravened. Without detailed explanation, especially in a “for convenience” situation, the sender might face a lawsuit for unethical behaviors. Thus, be sincere and explicit as you draft and send the contract termination letter.
Contract Termination Letter Templates
Template 1:
Dear (Recipient),
We are writing to intimate you of our decision to discontinue our agreement with (Receiving Company Name), effective from (Day, Month, and Year).
Our contract termination notice is coming at (Number of days) notice, in accordance with the provision of the ongoing agreement. Although your company has been of tremendous service to us in times past, we believe that parting ways now will be of utmost benefit for our company.
Here is the reason we are taking this path: On (Date of incidence), (Receiving Company Name) violated the terms of the agreement when (details of the breach).
From now henceforth, (Issuing Company Name) will no longer transact business with your organization. However, we will not cancel the existing orders before the delivery of this notice. If there will be any changes concerning this clause, we will inform you in writing. Also, we hope that your company will fulfill all orders before the effective termination date. For us, we will make outstanding payments by (date). Therefore, ensure to forward appropriate invoices by (date).
Please accept this letter as our farewell message and request to close our account with your company. If there are questions or clarifications, kindly reach us via (email address) or (phone number).
Our decision is final and permanent. Once more, we appreciate your business deals with us thus far.
Template 2:
Name of Sender
Name of Sender’s Company
Title of Sender
Address of Company
City, State, Zip Code
DATE
Name of Vendor Manager
Name of Vendor’s Company
Address of Vendor’s Company
City, State, Zip Code
Dear Name of Manager,
I’m writing this letter to inform you that the contract (Name of Company) has with you to supply 50 cartons of milk per week will expire on (DATE). We won’t renew the contract. As stipulated by the contract, we can cancel the contract at any time before its expiration.
Our company no longer requires bottled milk because we have invested in another company that would provide us with milk in cartons for a reduced price. We will keep accepting the regular delivery until the expiration date. You can send the invoice as usual at the end of the month to enable us to pay.
I would like to thank you on behalf of (Name of Company) for the quick and fantastic service you have rendered over the past six years we have been getting deliveries of bottled milk from you. I would be glad to personally give a positive rating on your good service and your product.
If you have any inquiries, please call me at +9213254189 or reach me at [email protected]. Thank you for everything.
Sincerely,
Signature of Sender
Printed Name of Sender
Position of Sender
Download Free Samples
Although business transactions often have a binding contract, there may be a need to end such agreements. To do this, create and send a contract termination letter to the other party. Some reasons to discontinue an ongoing contract include insolvency, natural disasters, or illegality.
You do not have to start from scratch to create a contract termination letter. On our website, we have several samples and templates that you can customize for your purpose. They contain spaces where you can fill in essential details. Also, you can get these examples and templates in DOC and PDF formats. Check these resources and download them here.
Frequently Asked Questions
Do both parties have to agree to terminate a contract?
Although it takes just one party to initiate the termination, the other party must consent to it. Otherwise, the recipient may initiate a lawsuit.
Difference between cancellation and Termination of a contract?
According to the Uniform Commercial Code (UCC), cancellation occurs when the initiating party receives full reimbursement for incurred liabilities due to a breach of contract. Moreover, termination is a broad term that refers to the act of ending an agreement by one or both parties.
Can a written contract be terminated verbally?
Most laws encourage written termination. However, where either or both partners consent to verbal discontinuation, the law recognizes it.