What Are the Requirements for a Business Contract Termination Letter?

A contract termination letter must clearly state the reason for termination, reference the original contract, and follow required notice procedures. Ensuring proper documentation and adherence to contract terms helps prevent legal disputes and wrongful termination claims.

By Brad Nakase, Attorney

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Table of Contents

1. What is the termination of a contract?

2. Reasons often cited for contract termination

3. Methods for terminating a contract

4. How to end a contract

5. What follows the end of a contract?

6. What are the consequences of making a mistake when terminating a contract?

7. Methods to prevent contract termination

What is the termination of a contract?

Contract termination is the furthest thing from one’s mind when entering into a contract. But not every agreement can be considered a lasting one. There are several reasons why contracts fail, and this frequently leads to the contract’s termination. You may be wondering, though, when and how one might actually terminate a contract. Let’s take a look.

The process of terminating a contract occurs before all parties have fulfilled their obligations under it. If this is the case, then the parties to the contract have decided to end it sooner than they had planned when they signed it.

The breaking of a contract releases each party from any further duties or commitments they may have had. The term “discharging a contract” is another name for this action.

Reasons often cited for contract termination

The possibility of the contract’s early termination may not be high on your mind when you sign it. Yet, it does occur. Actually, there are a handful of typical grounds for contract termination. Below, we have discussed a few situations.

A violation of the agreement has taken place.

The most typical cause for contract termination is when one party fails to fulfill their obligations under the agreement. This occurs when one party does not live up to their end of the bargain or behaves in a manner that goes against the rules outlined in the agreement.

In this case, the party that isn’t in breach of contract can get out of their responsibilities by ending the agreement.

The party in breach is not, however, absolved of all liability under the contract. Damages or compensation for losses sustained by the counterparty due to the breach may still be payable by the party that breached the contract. All it does is allow the other party to back out of the agreement sooner than planned.

It is not feasible to carry out the contract.

Furthermore, if the parties cannot continue to perform their obligations under the contract due to circumstances beyond their control, they are each entitled to terminate the contract. This occurs when something beyond the control of the parties involved happens that makes it unlawful or extremely difficult to carry out the contract’s terms.

Consider the following scenario: you are drafting a contract. At the time of its creation and execution, the duties contained within this agreement were fully lawful. But then a law came into effect, rendering the parties’ obligations null and void.

The parties could opt to end the contract and absolve themselves of these obligations completely to stay out of legal trouble. When one party is unable to fulfill their obligation under the contract, it is not considered a breach of contract.

It is in everyone’s best interest for the contract to come to an end.

The parties may also choose to end a contract early if they feel it isn’t adding value to their lives. This may also occur if the parties involved are unable to cooperate.

It is imperative that in this instance, all contracting parties reach a consensus regarding the termination of the contract.

For instance, this is a common occurrence in employment contracts. Both the employer and the employee have the right to mutually decide that a job isn’t a good fit or isn’t working out. This is possible regardless of whether their employment is on an ongoing or fixed-term basis. (For this, you may want to consult a sample employment termination agreement).

By ending the agreement in this manner, each party is free to pursue their own interests without fear of repercussions. In the majority of instances, a mutual release agreement template will serve as a solid foundation.

Methods for terminating a contract

It is interesting to note that the reason for terminating a contract can play a role in determining the manner in which the contract is ended. The two most common reasons to end a contract are “cause” and “convenience” reasons. Now, let’s delve into these together.

Termination due to a valid reason

When one party’s behavior or lack thereof leads to the contract’s collapse, this is known as termination for cause. For instance, it may be due to their breach of contract, which occurs when they either do not want to or are unable to fulfill their contractual duties.

A termination for cause clause specifies the circumstances under which one party may end the contract without the other’s consent and is a standard component of most contracts.

Convenience termination

Conversely, under a termination for convenience clause, neither party is required to show fault or breach in order to end the contract. When a relationship or contract is no longer beneficial to either party, this form of termination can help bring about a more amicable end.

The parties must typically have included a provision in the contract itself that permits termination for convenience if they wish to do so.

When the 30-day notice period is up, for instance, some contracts allow for early termination. This allows either party to terminate the agreement at any time and for any reason.

How to end a contract

We have gone over the process of terminating a contract, the circumstances under which such a termination would occur, and the two distinct types of termination. However, we have not yet discussed the process of actually terminating a contract. Let’s get started.

Verify that there is a valid reason for termination.

You should know if you have grounds to terminate a contract before expressing your intention to do so.

Typically, the contract language will outline this right to cancel. By looking for a termination clause in the contract, you should be able to determine whether you have a valid reason to end the agreement.

Additionally, in the event of a breach of contract, there is a general right to terminate the contract. Under common law, there is this rule regarding repudiatory breaches. For a breach to be considered repudiatory, it must be so serious that it renders the contract useless.

Consult an attorney or lawyer for advice if you are still confused about your termination rights. Even better if you’re fortunate enough to have an internal legal team.

Compose a notice of contract termination.

The next step, after determining that you have grounds to terminate your contract, is to give notice of your decision to do so. To end a contract, you must provide notice, regardless of your reasons.

A written document outlining your choice to terminate the contract, your reasons for doing so, and the grounds for doing so is the standard form of notice. Commonly, the notice will also specify the method and date for contract termination.

The termination notice should also specify the nature of the serious breach and the fact that it rendered the contract unresolvable. Also included should be a discussion of the breach and the potential damages, as well as the process for awarding them.

Termination letters can take many forms. Professionally prepared contracts often outline the format and content of this termination notice. There may have been a specified notice period and address specified in the original contract.

For that reason, while determining the method of delivery and the subject matter of this notice, the parties should constantly look to their original contract.

Submit your notice of termination.

After you have drafted your notice of termination of contract, the next step is to actually deliver it. We already established that the majority of contracts will specify the precise manner and recipients of such notice.

Correctly terminating your contract depends on your following these instructions. Failure to do so may lead to legal complications regarding the improper termination of the contract. But we’ll get into that more later on.

What follows the end of a contract?

Your success in terminating the contract will relieve the other party of any further responsibilities under the terms of the agreement.

The party that breached the agreement may be liable to the other party for damages caused by the termination and the breach if the action was particularly severe. This may include injunctions or damages.

What are the consequences of making a mistake when terminating a contract?

You might be in legal hot water for wrongful termination if you try to end a contract without valid reasons or if you do it wrong. Because of this, the other party may have the legal right to sue you instead.

This is something to think about before immediately terminating the contract due to a minor breach by the other party. To terminate a contract, a material breach is usually required. If it isn’t, then you can’t legally get out of the contract.

Methods to prevent contract termination

The process of terminating a contract can be difficult and unpleasant for all parties involved, especially if their interests are at odds. Building stronger contracts from the start and keeping track of your contractual responsibilities correctly is much more effective. This means you won’t need to end the contract.

However, rapidly expanding companies with small legal departments have a tough time managing contracts. Actually, they frequently deal with the same issues:

Nothing in place to keep track of contracts: Finding and referring to existing contracts after signature can be a challenge for many businesses due to their lack of a structured approach to contract storage.
Contracts are not easily accessible: It is difficult to search through most contracts because they are built as static documents. As a consequence, the business and legal teams are blind to their own contractual responsibilities and have no way of knowing whether or not their counterparties are living up to their end of the bargain.
Inadequately written agreements: It is common practice to let business teams draw up contracts independently, without any oversight. This may lead to unfavourable terms in the contract and create contract risk.
Swapping between different tools: To finalize contracts, businesses frequently use a combination of electronic signature tools like HelloSign or DocuSign, as well as Word, email, shared drives, and others. This may lead to disagreements and issues with version control.

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