What is Contract Termination
From a legal standpoint, the common law of England recognises two basic grounds for a party’s ability to terminate a contract: by a "mistake" (which operates at the time of entering into the contract), or "breach".
Contract termination refers to an act whereby a contractual party is no longer bound by all the contractual obligations. Termination does not always mean that the contract continues to exist; however it does generally entail that the contractual obligations of the parties do not continue or, where they do continue, the ways in which they operate have, in certain specified ways, changed. A party who is entitled to terminate a contract is not under a duty to exercise that right.
The reason behind or the basis for termination is normally found within the contract terms, and it does not necessarily affect the effect of the termination process. It is also important to note that contractual terms may alter the right to terminate from a date specified in the contract or from the provision of a notice of termination.
Under English law, it is generally accepted that the concepts of "summary dismissal" or "breach" carry the meaning of "wrongful dismissal", and this is an important distinction – the latter entitles the employer to claim damages, while the former does not.
However, there are instances when a party may be forced to terminate a contract , for example where it is impossible for the parties to carry out the terms of the contract, or where it has become illegal to fulfil the contract requirements. Likewise, a party may choose to terminate a contract when it is in breach of its obligations. An example of this may include a case where a contract is, for example, being carried out recklessly without regard to the other party’s best interests.
From a legal perspective, a party’s obligations may be frustrated, for example, when it becomes impossible to perform a contract because of events such as a new law. However, the events must occur after the contract is formed, and must be unforeseen. The law therefore differs at this point, and pertains more towards frustrating factors than termination by a party.
The standard English law grounds for a party’s termination of contract are:
The specific reasons for contract termination, for example in a dismissal case, are shown in the case of Hardy, where it was found that the grounds on which an employee could bring a contractual action for wrongful dismissal are:
Additional reasons for contract termination may also be included in the contract terms themselves, for example:
If a party terminates a contract prior to the agreed date, the consequences include the parties being required to compensate an innocent party, which may include a price reduction, as well as the possibility of litigation if either party elects to have the matter heard by the courts.
The Essential Parts of a Contract Termination Letter
The contract termination letter must include the full dates of the contract, the parties involved, and a description of the basis for termination. It should reference the conditions of the agreement that allow for cancellation. Most commercial agreements contain a termination clause specific to proper termination. The letter should include any required notices and time frames for an intent to cancel. Including the date of the letter, the name and address of the parties, and the date and titles of the agreement is essential information. Any requirements of notice and time frame for cancellation based on breach of contract or lapse of time must be included in the termination letter. Failure to properly terminate, according to the requirements of the contract, may extend the effective date of the agreement.
How to Write a Termination Letter: A Step by Step Guide
Follow this step-by-step guide to writing a termination letter properly:
Set the tone. The tone of a termination letter should be formal and respectful. Remember that this letter is a legal document, and while you can be sensitive to feelings, you are not writing a note to a friend. Short of using all caps and exclamation points, you should assume your letter will one day be published in a book of crazy employer stories and written in too large a font.
Maintain a formal structure. Your termination letter must include the full name of the employee being terminated and his or her position with your company. Follow your opening salutation with your company’s name and your name and title. Write from your company’s point of view. For example, although it may feel a little weird to refer to yourself as "the company," it’s absolutely necessary. A good rule of thumb for any formal letter is that if you’re not comfortable signing your name to something, then it’s probably not the right thing to put into the letter.
Compose the body of the letter. With that formal rule of thumb in mind, the body of the termination letter doesn’t have to be long. You should, however, maintain respect and compassion throughout. The termination of employment is never a good day for anyone. Try to be positive while remaining truthful about the reasons that led to the termination. In most cases the employee already knows why he or she is losing the job, so this is not the time to pretend otherwise.
The body should begin with an opening paragraph that states briefly that the employee’s employment has ended. Be direct but respectful, just like in an in-person meeting. You might consider including a closing note to the employee, such as, "We appreciate your time with us and wish you the best in your future endeavors." This step is optional and would be more appropriate if the termination is due to a layoff versus misconduct. Closing the letter with a simple, "Sincerely" should be sufficient.
Send the letter out. The last step in terminating an employee is delivering the letter to that employee. If you used email or were otherwise present when you met with the employee, the letter will be delivered and you can call it a day. If you sent the employee home without email access, you will need to create a hard copy of the letter and deliver it via a secure method, i.e., hand delivered by a representative of your company.
Typical Pitfalls
There are two common missteps that can be ruled out right off the bat. First is to NOT serve a written Contract Termination Letter. A verbal termination is entirely insufficient in enforcing a termination of contract because it doesn’t provide for any unequivocal evidence that the termination actually occurred or is supported by a legal basis for its enforcement.
Second, and related, to ensure the effectiveness of a contract termination letter, you need to do more than just serve it — you need to make sure it’s received by the other party. The golden rule here is that the best way to show receipt is to use a means that gives you proof of service. Sending the termination via registered mail/return receipt or having a third-party delivered the letter who can effectively testify to the delivery are usually the go-to means of proof of service. Additionally, you’d want to "CC" a copy of the letter to one of your other representatives (again serving as a witness) who can testify to the delivery.
In some cases, the other party to the contract might purposely avoid receiving the letter. To counteract this, I recommend sending out a few additional copies of the termination letter to different parties to show that you are being superfluous in your termination. In the event that they were purposely avoiding receiving the termination letter, they won’t be able to claim ignorance of the termination letter.
Legal Grounds and Consequences
The first and foremost concern is ensuring that a termination is valid in the eyes of the law and not actionable as a breach of contract. To minimize risks, it’s always a good idea to get proper legal advice before terminating a contract, particularly if the contract has been active for a while and there are established patterns of conduct that might affect the termination. Repairs made outside of the warranty period, for example, can create continuing obligations on the part of a contractor for the duration of the lease term. In many contracts, there may be specific procedures for termination, and failing to follow those procedures can be fatal to even a case with strong merits. For example, many contracts specify a minimum period of advance written notice. If that procedure is not followed, any efforts to terminate the contract could be invalid. Additionally, it pays to ensure that the person you deal with at the other end has the authority to accept the termination . The most frustrating thing of all is that, after you have properly terminated a contract, you learn that the organization doesn’t have a clear procedure for deal with terminations – creating a situation where the other party is not bound by the evidence you both agreed to. Finally, if the other party fails to respond, or objects, a judge may need to decide the matter. In many jurisdictions, the judge will continue the contract for a "trial run" to determine if the relationship is in fact mandatory. This is a highly fact-specific inquiry. Failing to show up for the hearing is a good way of ensuring that the judge will side against you. In some cases, an injunction may result. An injunction may require you to fully perform the terms of the contract, and allow the party in breach to perform its obligations late. This may be filed because the court believes that damages (compensatory) are not good enough to prevent the loss of a relationship. But in many cases, the other party will be awarded a crock of damages.
The ECG Law Firm has been helping clients in Alexandria and the greater D.C. area for years. If you would like to discuss contract law or the termination of a contract, contact us today.
Contract Termination Letter Samples
Employment Contract Termination
[Your Name]
[Your Address]
[City, State ZIP Code]
[Date]
[Employee’s Name]
[Employee’s Address]
[City, State ZIP Code]
RE: TERMINATION OF EMPLOYMENT CONTRACT
Dear [Employee’s Name]:
This letter is to inform you that as of [insert effective date], your employment with [insert company name] will be terminated. Your last day of employment will be [insert last day of employment].
If you have any company property in your possession, please return it to us by the end of the day on [insert last day of employment]. We will pay you for all accrued but unused vacation time and other accrued benefits through your last day of employment in accordance with our published policy and state law.
We will notify you how and when you will receive your final paycheck and what benefits you are entitled to and the manner in which those benefits will be distributed. You are entitled to continued coverage under the Consolidated Omnibus Budget Reconciliation Act of 1985 ("COBRA").
This letter does not constitute a contradiction of any of the terms and provisions of our separation agreement.
If you have any questions, please call me at [insert phone number/e-mail].
Sincerely,
[Your Name]
[Your Title]
[Company Name]
Services Agreement Termination
[Your Name]
[Your Address]
[City, State ZIP Code]
[Date]
[Service Provider Name]
[Service Provider’s Address]
[City, State ZIP Code]
RE: TERMINATION OF SERVICES AGREEMENT (OPTIONAL)
Dear [Service Provider Name]:
This letter is to inform you that as of [insert effective date], the services agreement between you and [insert company name] will be terminated pursuant to the terms of the agreement.
If you have any questions, please call me at [insert phone number/e-mail].
Sincerely,
[Your Name]
[Your Title]
[Company Name]
Partnership Agreement Termination
[Your Name]
[Your Address]
[City, State ZIP Code]
[Date]
[Partner’s Name]
[Partner’s Address]
[City, State ZIP Code]
RE: PARTNERSHIP TERMINATION
Dear [Partner’s Name]:
This letter is to inform you that as of [insert effective date], the partnership agreement between you and [insert company name] will be terminated pursuant to the terms of the agreement.
If you have any questions, please call me at [insert phone number/e-mail].
Sincerely,
[Your Name]
[Your Title]
[Company Name]
Commonly Asked Questions
What should I include in a contract termination letter?
Your contract termination letter should clearly identify the contract you are terminating, state the reasons for termination in accordance with the terms of the contract, state any actions you require of the other party in order to resolve the remainder of the contract if necessary (such as "send any outstanding invoices within 30 days of the date of this letter" or "return all confidential information within 10 days of the date of this notice") and state when the contract is terminated as of.
What if the contract termination letter is being used to terminate an employee’s contract of employment?
Some employers have a contract of employment with each employee and these can be terminated by letter. In many countries, an employee has the right to claim redundancy and other rights on termination of employment and this needs to be factored in to the contract termination letter.
What if I don’t know the address of the other party?
The contract termination letter can be sent to the address of the other party that is contained in the contract . If you do not have this address to hand, you can look it up on the internet or contact the other party and ask for the details.
What happens if I don’t send a contract termination letter?
If you don’t send a contract termination letter the contract may continue. In some circumstances, the other party may be able to claim breach of contract against you. Therefore, it is advisable to send a contract termination letter.
Do I need to send a contract termination letter to several different people?
If you have several different people parties to a contract, for example, shareholders of a business, then you may need to send a contract termination letter to each of them individually. You will need to agree in some cases who the contract is being terminated by and on what terms.
Is there any advice for a contract termination letter for sale of a business or a contract termination letter for breaching employment?
If you are terminating a contract for the sale of a business or terminating an employee’s contract of employment, you should seek legal advice, as there may be additional matters to consider such as compliance with employee law and disclosure obligations with respect to a share sale.
