What is Contract Termination?
A contract termination is a legal term meaning that your business will no longer continue with the contract as it has been made. This could mean that you would lose your right on pursuing its terms and can no longer force the other party to fulfil its obligations. The termination of contract can be applied to any contract which you deem unfit for your business. However, the termination should be supported by legal grounds. Hence, at the time of termination, it is important that you have reserved legal remedies which have been imposed on the other party. The best practice is to include these remedies as clauses in the original contract (when discussing its terms). The legal grounds for terminating a contract include: • Incompetent parties – if the parties entering into a contract are found not to have the legal capacity of doing so, it would make them incompetent parties. In this case, the aggrieved party can seek compensation from the other party for any damages witnessed . Additionally, the other party could lose his right to payment. • Breach of contract – if the obligor has committed a breach of contract, and the aggrieved party has the grounds to terminate the contract, he can seek for the other party to pay damages. The agreement will have to be terminated at the time of breach. • Mutual mistake – if either of the parties has entered into the contract due to a genuine mistake made about the contract, a termination can be sought. • Impossibility or illegality of performance – prior to the execution of the contract, the parties should make sure that it is possible to be performed. If the performance of the contract is impossible or illegal, then a termination can be sought. • Misrepresented contracts – if a party has made representations to the other party at the time of making the contract, and if it was discovered that those representations were misrepresented, then a termination can be sought.
Basic Parts of a Termination Letter
List the parties – list the business name, physical address of the business and the date you started doing business. Then, make sure to identify the other party or parties. If you are terminating services received from a local adminstrative agency, then you should have their contact information on hand and refer to their proper and legal name in the letter.
Reference to the contract – a good termination letter will include a reference to the contract by the date you initially signed the agreement. It is pertinent that you identify if this is an annual agreement, month to month, or simply a one time deal.
Reason for Contract termination – it is always a good practice to state the reasons behind your decision to terminate. If it is something serious, such as failure to perform, you may want to be specific in your termination letter. If it’s simply a matter of convenience, then you may want to keep it simple. When you question whether you will be breaking the contract by stating the reason, it is usually best to avoid the reason in the termination letter.
Effective date of the termination – you must state when this contract will terminate and become null and void. For example, you may want to terminate the contract on March 31st. If you do not specify the date, then the other party will have no reason to believe the contract is terminated and null and void.
Legal Issues Associated with Contract Termination
When it comes to termination of contract, legal considerations come into play. For instance, if you have not fulfilled your end of the deal (been on time to weekly meetings, or completed a project to the standards of the contract) you may be in breach of the agreement and will likely not be able to terminate the contract without putting yourself at risk of being taken to court. A breach of contract does not necessarily mean you need to be taken to court, but it means that you are breaking the agreement in some way, either large or small, and you may find yourself having to pay the costs of that breach.
The other legal consideration is what we like to call the "notice period." If the contract was agreed upon for 6 months, then an early termination without good reason can, and likely will, result in repercussions. Because it’s very common in small business contracts to be asked to take on work for an undisclosed period of time, or without any specific end date, it’s important that you have guidelines that allow you to end the contract as soon as you realize the working relationship isn’t going according to plan. For instance, if the scope of work keeps changing or your client prefers to provide you with last-minute notice on projects, these things can impede your ability to deliver quality work. But, if you don’t have a contract to protect your ability to end it, you could find yourself stuck.
Short notice periods for termination can often be a red flag – if a client is unwilling to at least agree to note the reasons for the short notice period termination, you can safely assume that paying a little more for a longer notice period is worth it in the end. That means, if you’ll only be agreeing to one 6-month contract for the year, and have multiple clients, you may want to pay less per contract to secure longer notice period.
Unfortunately, abusers of short notice termination clauses are often problematic and can even refuse to pay for services provided prior to your termination. This is a risk of short notice termination that is often caught in general contracts.
Another situation that often leads to a terminated contract is bankruptcy. When a company files for bankruptcy, their contracts are often affected. However, depending on the type of contract in question, your contract may not be subject to the bankruptcy. For example, an exclusive contract is often not subject to the bankruptcy of a client, whereas a contract for goods is. If you are providing a service to a company that files for bankruptcy, be sure to speak to a lawyer to find out more about the status of your contract.
If you are concerned about any aspect of the contract termination, be sure to consult a lawyer before sending a termination letter. You want to ensure that you protect your rights and you have the best possible chance of recovering any money you may have spent while the contract was in place.
How to Compose a Termination Letter
- Write the letter in the appropriate format for your agreement.
- Be sure to identify the parties to the agreement as set forth in the agreement, as well as the date of the agreement and its subject matter.
- Be sure to reference the termination provision that you are utilizing with sufficient specificity to be clear and to track the language of the agreement.
- Indicate the effective date of termination, if required by the terms of the agreement.
- If there is a provision for notice, include the notice requirements and method of notice (do not be concerned if you are outside of the notice period; you can still terminate the contract).
- Depending on the terms of the contract, it may be advisable to include a provision that the parties are to proceed in good faith to wind down the relationship. For example, there might be agreements that the parties are to continue to provide certain services during the winding down period, such as a transition period for months in which the parties are BICs under the same sponsoring broker.
- Depending on the tone of the partnership as confirmed in the contract, you may want to advise the other party to leave within the time limit, or you may simply be able to serve notice that the contract will terminate after specified period of time.
- Depending on the type of relationship and the terms of the agreement, you may want to review with counsel and prepare the client for the worst-case scenario, such as communication to customers.
The important thing is to follow the terms of the contract.
It is generally advisable to send letters of termination by certified mail. This provides proof of receipt. When sending a termination letter to a registered representative, use an alternative method of service as well. For example, send the letter via certified mail and fax.
Termination Letter Mistakes
The most fundamental mistake is to think that a contract can be terminated when in fact it cannot, despite the termination of some other agreement between the parties. The courts are very clear on the fact that termination is normally a matter of contractual agreement. So make sure you get external legal advice before writing a letter of termination. Secondly, a contract cannot normally be terminated without giving notice as specified in the contract. Carefully read the termination provisions of the contract and ensure you comply with them. Thirdly , it is often the case that a contract cannot be terminated because the breach is so minor, or insignificant, that the innocent party is not entitled to terminate the contract. Contracts for service and supply agreements tend to contain provisions that say if the breach can be adequately compensated by damages, this is the only remedy available to the innocent party. If you give a letter of termination that wrongly purports to bring a contract to an end, you risk being in breach of that contract and being liable to the innocent party for damages if they sue. If in doubt, seek advice first.
Final Steps After the Termination Letter
After you’ve sent the termination letter, you may have to follow up with the other party to confirm the termination. In some circumstances, the other party will have to confirm the termination back to you. For example, under personal service contracts, a consumer may have a statutory right to cancel within a certain number of days. The Consumer Contracts Regulations may also require standard cancellation terms if the consumer will cancel. So it may be necessary to re-confirm termination in writing.
There will be other obligations arising from the termination. In some cases, the parties may need to work together to bring about a full and formal termination of the contract. There could be restrictions on what one party must or can do after termination.
Many contracts contain obligations relating to confidentiality during and after termination, including by employees. As required, these could need to be dealt with in writing.
There may be terms relating to return and/or provide a copy of confidential information, for example, a copy of intellectual property or business records. You should check for any such obligations and whether they have been complied with, and how obligations on review and return of documents can be enforced if necessary if not complied with.
Networking, social media and other contacts and knowledge gained in relation to one contract at the other party’s cost then becoming the property of the other party may be an issue to consider. Your relationship with customers is the biggest asset either of your businesses has—so if there are any restrictions that apply, these may need to be revisited in either a new contract or a deed of variation or restatement of the existing contract.
Damage to reputation, particularly on social media, may need to be kept in check.
Termination Letter Template
[Your name]
[Your address]
[City, state, zip, country]
[Today’s date]
[Addressee’s name]
[Address of Addressee]
[Today’s Date]
Dear [Addressee’s name],
I wish to terminate the following contract in accordance with paragraph [insert paragraph number]. Specifically, paragraph [insert paragraph number] states that either party may terminate this agreement by giving at least [insert amount of days, for example, thirty (30)] days written notice to the other party . This is my minimum "correct" notice as required by the contract. However, you are hereby notified that I will be vacating the premises on or before [insert specific date as applicable]. You must return my security deposit as required by contract and the laws of the state of [state law in which contract was signed].
Thank you,
[YOUR SIGNATURE HERE]